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EU urges Indian government not to make mandatory for European banks to dilute stake to 74% in subsidiary

Economic Times, India

EU urges Indian government not to make mandatory for European banks to dilute stake to 74% in subsidiary

By Dheeraj Tiwari & Amiti Sen,ET Bureau

6 June 2011

NEW DELHI: The European Union has sought concessions for its banks if they are asked to migrate to the wholly-owned subsidiary model proposed by the Reserve Bank of India (RBI).

The 27-country block has urged the Indian government not to make it mandatory for European banks to dilute their stake to 74% in the subsidiary. The issue was raised at a bilateral meeting called in Delhi last month to discuss the India-EU Free Trade Agreement.

"The EU is not comfortable that banks have to dilute stake," said a senior government official privy to the discussions. "Demands were also put up for further relaxation in terms of branch licenses and easing the priority sector lending norms."

The finance ministry, however, is not in favour of giving any relaxation to the European banks.

"India has, so far, refused to accommodate it in the agreement," the official said.

There are about nine European banks operating in India at present, with nationalized Dutch lender ABN Amro Bank NV’s application for a license pending with RBI.

Some of the foreign banks say if they were to dilute stakes, then they should be treated on a par with private Indian banks, such as HDFC Bank and ICICI Bank, in terms of branch licenses and other conditions. HDFC Bank and ICICI Bank have majority foreign holding.

"Foreign banks cannot be expected to meet priority sector lending targets and lend to farmers if they are confined to cities," a foreign banker told ET on condition of anonymity.

In January, RBI had released a discussion paper on the proposed new norms for allowing foreign banks to enter India. In the paper, the bank had suggested that foreign lenders conduct their operations in the country through wholly-owned subsidiaries rather than a branch model.

RBI had proposed that the wholly-owned subsidiary should be allowed to list and dilute its stake on completion of a minimum prescribed period of operation, so that at least 26% of its paid up capital was held by resident Indians at all times.

The current rules limit foreign direct investment in private banks at 74%.

The discussion paper had invited comments from all the stakeholders.RBI is expected to come up with comprehensive guidelines soon on the mode of presence of foreign banks in the country after reviewing all the feedback.

The EU is also seeking concessions for banks and insurance companies under the financial services component of the Free Trade Agreement.

After several rounds of negotiations, both sides are now close to a deal, which will include agreements on opening up markets in goods and services and liberalising the investment regime on government procurement.

Commerce Secretary Rahul Khullar met EU’s Director General of Trade Jean-Luc Demarty in London last Friday to tie the loose ends of the deal. Senior officials from the two sides are expected to meet later this month.

This meeting will be followed by Commerce Minister Anand Sharma’s visit to Brussels in July where the two sides are expected to announce closure of the deal.